New Zealand Super's active investments accounted for more than 300 basis points of the fund's 13.2% gain for calendar year 2016, but future returns look to be more muted, executives of the NZ$32.7 billion ($23.8 billion) Auckland-based fund warn.

Matt Whineray, NZ Super's general manager and chief investment officer, in a Feb. 1 interview, said his team is finding fewer opportunities now to put its risk budget to work in search of active returns. A year ago, “we would have had twice as much risk on,” he said.

The CIO said he's similarly cautious on the outlook for global growth even as markets have run in recent months on expectations of favorable fiscal and tax policies from newly installed U.S. President Donald Trump.

“It's an open question for us” whether an upgrade of global growth forecasts is warranted, said Mr. Whineray.

That leaves expectations about earnings levels and growth as factors driving markets now, and while many appear willing to accentuate the positive, Mr. Whineray said the possibility that growth will be lower can't be ruled out.

He cited increasing uncertainty among companies in areas such as supply chain costs and where they should make capital investments now as factors that could start to affect decision-making, and eventually markets as well.

Looking backward, however, Mr. Whineray cited the rebound in U.S. interest rates following Mr. Trump's unanticipated Nov. 8 election victory as a key contributor to NZ Super's active returns for the year, reflecting its decision to leave the portfolio's exposure to the Barclays Capital Global Aggregate index well below the 20% target dictated by the fund's passive reference portfolio.

What stood out for the year, though, when it came to the fund's efforts to add value was the breadth of positive returns, said Mr. Whineray, with NZ Super's internally managed “strategic tilting” and portfolio completion programs, as well as the fund's active external managers making contributions across the board.

The strategic tilting program — which employs derivatives and futures to add exposure to undervalued assets or lower exposure to pricey assets — delivered positive returns on equities, bonds and currencies, he said.

For equities, Mr. Whineray said the fund no longer treats global equities “as one big block,” instead tilting toward or away from six to eight big individual markets or regional markets. He declined to provide details.

For 2016, the strategic tilting program accounted for 170 basis points of the fund's total value add of 315 basis points. NZ Super's reference portfolio, meanwhile, enjoyed a 10.05% gain.

Mr. Whineray said NZ Super's forecast of average long-term returns of 8% to 9% have been built on expectations that New Zealand cash rate would be around 5% over the long run. At the moment, it's below 2%.

The investment team hopes to deliver another 2 percentage points of return a year by exploiting risk premiums, and then add another 1 to 2 percentage points through value-add investments, he said.

With risk assets now looking fully priced or pricey, the distribution of returns now has to be seen as “skewed to the downside,” he said.

In August, the fund extended its first factor-based allocations to Northern Trust Asset Management of NZ$300 million apiece, for passive strategies focused on value and low risk.

While there are a number of other factor-based strategies, Mr. Whineray said NZ Super has particular confidence in low risk and value, adding that his team opted for “a little bit of diversification” by hiring two managers and benefiting from the differences in the way Northern Trust and AQR manage those factors.